Bubble Meter is a national housing bubble blog dedicated to tracking the continuing decline of the housing bubble throughout the USA. It is a long and slow decline. Housing prices were simply unsustainable. National housing bubble coverage. Please join in the discussion.

Wednesday, August 04, 2010

House prices vs. rents

Nominal home prices vs. nominal rents:

After yesterday's blog post, in which MacroMarkets LLC suggests national home prices are actually undervalued, I decided to post another home price graph on my website. This one compares home prices to owner-equivalent rent inflation (i.e. nominal home prices vs. the nominal amount they could rent for). Like my original housing graph, the price vs. rent graph suggests national home prices are still overvalued.

Also, despite the fact that Robert Shiller is chief economist at MacroMarkets LLC, his own graph available in a spreadsheet at irrationalexuberance.com suggests that home prices are still overvalued compared to their historic inflation-adjusted norm.

James, much credit to you for responding to the comments and creating posts that enhance and build on the discussion!

One question for you. You mention that Shiller's "own graph" suggest home prices are still overvalued. When I look at the graph and then "add a trend line" to "home prices", then home prices are indeed below the trend line now, which suggests they are undervalued, no?

James, this is a fantastic blog. I want to include it in the Zillow People's choice award "Best DC Blog" competition that is starting soon. You in? If so, email me so I have your address, and I'll send you all the info.

JAC said..."One question for you. You mention that Shiller's 'own graph' suggest home prices are still overvalued. When I look at the graph and then 'add a trend line' to 'home prices', then home prices are indeed below the trend line now, which suggests they are undervalued, no?"

Are you including the bubble period in your trend? If you've got a 110-year period of relatively flat prices (adjusted for inflation), followed by a huge and temporary bubble, of course the trendline will be upward sloping. The bubble distorts the trendline's slope.

With my graphs I measure the pre-bubble trend only, to avoid any distortion. And surprise, surprise! It gives me a slope that closely matches the change in rental prices.